Machines Have Taken Over the Stock Market

In another example of why normal Americans just shouldn’t play the casino that has become the stock market, a runaway trade bot threw the NYSE into turmoil yesterday:

An automated stock trading program suddenly flooded the market with millions of trades Wednesday morning, spreading turmoil across Wall Street and drawing renewed attention to the fragility and instability of the nation’s stock markets.

While the broad stock indexes quickly recovered and ended the day slightly down, it was the latest black eye for the financial markets. The runaway trading suggests that regulators have not been able to keep up with electronic programs that increasingly dominate the supercharged market and have helped undermine investor confidence in stocks.

Traders on Wednesday said that a rogue algorithm repeatedly bought and sold millions of shares of companies like RadioShack, Best Buy, Bank of America and American Airlines, sending trading volume surging. While the trading firm involved blamed a “technology issue,” the company and regulators were still trying to understand what went wrong.

The trading firm, Knight Capital Group, says they lost $440 million because of this “rogue algorithm.” That’s more losses in 15 minutes than their entire quarterly profits. The company has also lost well over 60% of their stock value. Between rogue traders and rogue algorithms, there sure are a lot of rogues on Wall Street. Fortunately it hasn’t hit the executive class yet.

Episodes like this, as well as the “flash crash” in 2010, prove the shadow play that the stock market has become. It’s dominated by these computerized trading programs that can often have a mind of their own. The fundamentals of the marketplace pale in comparison. It’s a big trading game that’s increasingly out of the control of the players. After the flash crash the SEC promised reforms, and still we get episodes like yesterday. The “circuit breakers” the SEC put in place to stop trading errors like this did not click in until 15 minutes after the market opened, missing almost this entire incident. And the circuit breakers monitor changes in price, not changes in volume. So they were almost useless in this case until after the damage was done.

Regulators are at a disadvantage because the system has increased in sophistication at the speed of light. One analyst said yesterday to the New York Times, “Things can get out of hand very quickly and there is nobody who can immediately do anything about it.”

Eventually, the NYSE decided to cancel trades on the affected companies, which roiled traders even further.

Maybe it’s time to take Wall Street back from the machines? Just a suggestion.

Machines Have Taken Over the Stock Market

In another example of why normal Americans just shouldn’t play the casino that has become the stock market, a runaway trade bot threw the NYSE into turmoil yesterday:

An automated stock trading program suddenly flooded the market with millions of trades Wednesday morning, spreading turmoil across Wall Street and drawing renewed attention to the fragility and instability of the nation’s stock markets.

While the broad stock indexes quickly recovered and ended the day slightly down, it was the latest black eye for the financial markets. The runaway trading suggests that regulators have not been able to keep up with electronic programs that increasingly dominate the supercharged market and have helped undermine investor confidence in stocks.

Traders on Wednesday said that a rogue algorithm repeatedly bought and sold millions of shares of companies like RadioShack, Best Buy, Bank of America and American Airlines, sending trading volume surging. While the trading firm involved blamed a “technology issue,” the company and regulators were still trying to understand what went wrong.

The trading firm, Knight Capital Group, says they lost $440 million because of this “rogue algorithm.” That’s more losses in 15 minutes than their entire quarterly profits. The company has also lost well over 60% of their stock value. Between rogue traders and rogue algorithms, there sure are a lot of rogues on Wall Street. Fortunately it hasn’t hit the executive class yet.

Episodes like this, as well as the “flash crash” in 2010, prove the shadow play that the stock market has become. It’s dominated by these computerized trading programs that can often have a mind of their own. The fundamentals of the marketplace pale in comparison. It’s a big trading game that’s increasingly out of the control of the players. After the flash crash the SEC promised reforms, and still we get episodes like yesterday. The “circuit breakers” the SEC put in place to stop trading errors like this did not click in until 15 minutes after the market opened, missing almost this entire incident. And the circuit breakers monitor changes in price, not changes in volume. So they were almost useless in this case until after the damage was done.

Regulators are at a disadvantage because the system has increased in sophistication at the speed of light. One analyst said yesterday to the New York Times, “Things can get out of hand very quickly and there is nobody who can immediately do anything about it.”

Eventually, the NYSE decided to cancel trades on the affected companies, which roiled traders even further.

Maybe it’s time to take Wall Street back from the machines? Just a suggestion.